Islamabad, Dec 23: In a significant ruling, Pakistani residents will no longer be required to pay taxes on rental income and capital gains earned in the United Arab Emirates (UAE) and the United Kingdom (UK). The Appellate Tribunal Inland Revenue (ATIR) Lahore issued a detailed judgment that clarifies this issue in light of Pakistan’s tax treaties with the UAE and UK.
According to the tax treaties, income derived from rental properties and capital gains in these countries by Pakistani residents is not subject to taxation in Pakistan. The ATIR’s ruling followed earlier conflicting judgments and sided with the taxpayer, confirming that the taxing rights on rental income and capital gains lie with the country where the income arises, not where the recipient resides.
The case involved a Pakistani taxpayer who declared exempt foreign income (rental income, capital gains, and bank profits) in their tax return. The Pakistani tax authorities initially argued that foreign income is not exempt for residents and that only a tax credit for foreign taxes paid should apply. However, the taxpayer contended that under the relevant tax treaties, the right to tax such income was given exclusively to the countries where the income is earned, i.e., the UAE or the UK.
The ATIR cited the principles of interpretation laid out by Pakistan’s Supreme Court and dismissed the tax officer’s argument that both the source country and the residence country could tax the same income. The tribunal emphasized that the phrase “may be taxed” in the tax treaties was meant to ensure that income from properties in one country, owned by a resident of another, would be taxed in the country where the property is located.
This judgment aligns with earlier precedents, and the ATIR ruled that the decision of an earlier division bench should be followed, as it had been more consistent with the interpretation of the treaties. Therefore, rental income and capital gains from properties in the UAE and UK earned by Pakistani residents are exempt from taxation in Pakistan under the existing tax treaties.
